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WestJet expansion likely rules out an encore performance

Enjoy WestJet Airlines Ltd.'s soaring third-quarter financial results. As good as they are, they make for a near-impossible act to follow for the Calgary-based carrier.

WestJet's 80-per-cent jump in profit from a year earlier – far above the Street's expectations – reflected high passenger demand at the same time the company was keeping a lid on its seating capacity. The resulting record loads (85 per cent of seats were filled in the quarter) allowed the airline to keep ticket prices high while its expenses remained contained – fuelling an operating margin of 12.5 per cent in the quarter, the company's highest in three years.

WestJet wasn't alone in experiencing such good times; operating margins were strong at many North American air carriers in the third quarter, as shrinking flight numbers kept planes filled to historically high levels and supported strong pricing. U.S. airline ticket prices were up 14 per cent from a year earlier.

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But while keeping your flight count down might bolster the basic supply-demand equation, it's not much of a recipe for growth, and WestJet knows it. Long known as the pesky little airline that persistently expanded into the market share of its bigger competitor Air Canada, Westjet's plans suggest it will return to that modus operandi next year – and those tight reins on capacity will soon loosen.

WestJet's available seating capacity is expected to jump 7 to 8 per cent next year – far above the 2-per-cent year-over-year pace in the third quarter. The company plans to launch WestJet Encore, a new small-aircraft regional service, in the second half of 2013, to fly to smaller Canadian communities that up until now have only been served by Air Canada.

WestJet is also reconfiguring its entire Boeing 737 fleet to provide four rows of expanded-legroom seating beginning in the first quarter of next year – a move intended to attract premium business class fliers, long the domain of Air Canada. Meanwhile, WestJet continues to expand service to sunny vacation destinations, and last summer introduced multiple daily flights into the competitive New York market.

All this comes as the economic climate continues to deteriorate. Canadian gross domestic product declined in August, and both job growth and the housing market have slowed markedly. The airline will be hard-pressed to maintain the solid passenger demand it has enjoyed in recent months as consumers' worries deepen. And with capacity expanding at the same time, those double-digit margins look fragile indeed in 2013.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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